How much of TI's 2006 earnings growth came from core operations versus one-time items?

Core growth was strong: continuing-operations EPS rose 30% to $1.69, and operating profit rose 32%. Reported net income of $4.34 billion, however, includes a $1.67 billion after-tax gain from the Sensors & Controls sale, which added $1.09 per share. Investors should anchor on the $1.69 continuing-operations figure when evaluating underlying performance.

Why did operating cash flow decline even though profits rose?

Operating cash flow from continuing operations fell to $2.45 billion from $3.61 billion. The main drivers were roughly $716 million of income tax payments tied to the divestiture gain, a $248 million increase in inventory, and lower accounts payable as TI paid for manufacturing equipment and foundry suppliers. Management characterized the decline as largely working-capital timing.

What does the 2007 restructuring mean for TI's margins and manufacturing strategy?

TI will stop production at an older digital factory and move equipment into analog plants, while shifting future advanced digital process development to foundry partners. Management expects about $200 million in annual cost reductions once complete and roughly $55 million in one-time charges spread across 2007. The strategy aims to lower capital spending and depreciation and reduce margin volatility, though it depends on foundry execution.

How concentrated is TI's revenue, and what risks does that create?

Revenue is concentrated in communications (about 50% of Semiconductor revenue) and in cell phones specifically, where about 80% of DSP revenue comes from. Nokia accounted for 11% of total 2006 revenue directly, and about 15% including indirect sales through contract manufacturers. Losing or reducing purchases from Nokia or another large handset maker would materially affect results.

Is TI's royalty income at risk, and how large is it?

Royalty income declined $87 million in 2006 as older patent license agreements expired. TI signed new agreements that management expects to produce roughly $80 to $90 million of royalties per quarter in 2007. Some licenses expire at the end of 2007 and in later years, so renewal terms remain a risk to this higher-margin revenue stream.

TXN 10-K FY2006 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 28, 2007. Cited figures are marked; the original filing is the authoritative source.

Texas Instruments reported a strong 2006, with revenue up 16% to a record $14.26 billion^a and diluted EPS from continuing operations up 30% to $1.69.

Growth was led by high-performance analog (up 33%) and DSPs (up 16%), and operating margin reached a record 23.6%. Semiconductors made up 96% of revenue and were the company's largest driver of profit, with a segment operating margin of 27.9%. Reported net income of $4.34 billion^b, or $2.78 per diluted share, was inflated by a one-time $1.67 billion after-tax gain on the sale of the Sensors & Controls business to Bain Capital for $3 billion.

Capital returns were the other major theme. TI repurchased $5.3 billion^c of stock in 2006, reducing shares outstanding by about 9%, and ended the year with $5.49 billion of authorization remaining. Cash and short-term investments fell to $3.72 billion, and operating cash flow dropped 32% to $2.45 billion because of tax payments on the divestiture gain and higher inventory.

Inventory rose to 75 days from 64, and management limited fourth-quarter production to work down stock, which signals some near-term demand softness. Looking ahead, TI announced in January 2007 a shift to co-developing digital process technology with foundry partners, plus the closure of an older digital fab.

The company expects about $200 million^d in annual cost savings, about 500 job reductions, and roughly $55 million in restructuring charges during 2007. Key risks include semiconductor cyclicality, dependence on the cell-phone market (Nokia was 11% of revenue), declining royalty income as older patent licenses expire, and exposure to fixed manufacturing costs.

02—Key points

Key Highlights

Record 2006 revenue of $14.26 billion, up 16% year over year, with Semiconductor at $13.73 billion (96% of revenue)
Operating profit of $3.37 billion, a record 23.6% operating margin, up 32% from 2005; gross margin reached a record 50.9%
Diluted EPS from continuing operations of $1.69 (up 30%); reported diluted EPS of $2.78 includes $1.09 from the Sensors & Controls sale gain
Sold Sensors & Controls to Bain Capital for $3 billion cash in April 2006, producing a $1.67 billion after-tax gain; acquired Chipcon for $183 million in January 2006
Returned capital aggressively: $5.3 billion in buybacks (about 172 million shares, roughly 9% of shares outstanding) plus dividends of $199 million; quarterly dividend raised to $0.04 per share
Cash flow weakened: operating cash flow fell 32% to $2.45 billion on tax payments tied to the divestiture and inventory build; inventory days rose to 75 from 64
January 2007 restructuring plan to shift digital process development to foundries and close an older digital fab; expected $200 million in annual savings, about 500 job cuts, and ~$55 million in charges in 2007

03—Questions

Frequently Asked Questions

How much of TI's 2006 earnings growth came from core operations versus one-time items?
Core growth was strong: continuing-operations EPS rose 30% to $1.69, and operating profit rose 32%. Reported net income of $4.34 billion, however, includes a $1.67 billion after-tax gain from the Sensors & Controls sale, which added $1.09 per share. Investors should anchor on the $1.69 continuing-operations figure when evaluating underlying performance.
Why did operating cash flow decline even though profits rose?
Operating cash flow from continuing operations fell to $2.45 billion from $3.61 billion. The main drivers were roughly $716 million of income tax payments tied to the divestiture gain, a $248 million increase in inventory, and lower accounts payable as TI paid for manufacturing equipment and foundry suppliers. Management characterized the decline as largely working-capital timing.
What does the 2007 restructuring mean for TI's margins and manufacturing strategy?
TI will stop production at an older digital factory and move equipment into analog plants, while shifting future advanced digital process development to foundry partners. Management expects about $200 million in annual cost reductions once complete and roughly $55 million in one-time charges spread across 2007. The strategy aims to lower capital spending and depreciation and reduce margin volatility, though it depends on foundry execution.
How concentrated is TI's revenue, and what risks does that create?
Revenue is concentrated in communications (about 50% of Semiconductor revenue) and in cell phones specifically, where about 80% of DSP revenue comes from. Nokia accounted for 11% of total 2006 revenue directly, and about 15% including indirect sales through contract manufacturers. Losing or reducing purchases from Nokia or another large handset maker would materially affect results.
Is TI's royalty income at risk, and how large is it?
Royalty income declined $87 million in 2006 as older patent license agreements expired. TI signed new agreements that management expects to produce roughly $80 to $90 million of royalties per quarter in 2007. Some licenses expire at the end of 2007 and in later years, so renewal terms remain a risk to this higher-margin revenue stream.

04—Continue

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